MonteQuest wrote:When the FED buy these new bonds, it does so with new money created out of thin air, thus the money the Treasury gets is newly created money.
Geeze, you're still not getting it.
I suspected I'd have to repeat it, and indeed I do: Why Quantitative Easing Isn't Printing Money.
All they're doing is swapping assets. If you barter a cow with your neighbor for two of his goats, there is no money exchanged. Neither you nor your neighbor need to create, or destroy, or even have any money at all, because the two of you are doing nothing more than swapping assets. The same thing happens when the Fed swaps treasuries with banks in exchange for excess reserves. Technically speaking, the Fed doesn't even need any money at all. This is why, as I pointed out before, they have unlimited capacity to buy (or, should I say, "buy") government debt. If you did not need money to buy/"buy" something, you could "buy" as much of it as you wanted or needed. It just so happens that the Fed's excess reserves are considered to be an asset as valuable as treasuries, so banks are willing to do the swap.
MonteQuest wrote:When the FED created money to buy the bad debt of the banks, it was a liquidity swap and no new money was put into circulation; for that to happen the banks would have to use the new reserves to meet reserve requirements and then lend out accordingly.
Except for the inconvenient fact that I just pointed out that Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves. And no, that is not me being condescending, that is the title of the paper.
MonteQuest wrote:So, when it is said that the FED can just buy all the new bonds with newly created money to avoid a default, it means flooding the money supply with new dollars which could, and will, lead to inflation.
See reply at top of post.